Monti needs EU success to win Italians back

June 21, 2012|Steve Scherer | Reuters

ROME (Reuters) - As his popularity continues its steady slide, Italian Prime Minister Mario Monti's political future hinges on his ability to counter Germany's focus on budget austerity as a way out of the euro crisis.

Though hugely popular when he came to office in November, his approval rating has halved as tax hikes and pension cuts exacerbated an already severe recession, and his labor reform estranged both unions and the business establishment.

To shore up his position, Monti has promised to soften German Chancellor Angela Merkel's focus on budget rigor over growth at the June 28-29 EU meeting.

"Monti will be in trouble if he can't come back from the summit with some sort of concessions from Merkel," said James Walston, professor of politics at the American University in Rome.

Market pressure to come up with clear and effective solutions to the euro zone debt crisis at the next summit is building. Spain is now in the cross hairs of the debt markets, and Italy's borrowing costs have also risen.

Monti's unelected government has faced increasing criticism from his parliamentary allies in recent weeks, especially from his predecessor Silvio Berlusconi, whose People of Liberty (PDL) party was walloped in last month's local voting and is rife with internal turmoil.

"Let's hope Monti knows how to use Italy's economic strengths and put pressure on Germany to soften its position," Berlusconi said. "I always fought against Germany's rigorous position, which poisons the economy."

Riding a tide of popular discontent with the effects of the euro crisis, and to revive his political fortunes, Berlusconi has floated the idea of Italy returning to the lira twice in the past three weeks.

Aware of the popular shift against his government, Monti - a former European commissioner - will emphasize his EU credentials by hosting French President Francois Hollande, Spanish Prime Minister Mariano Rajoy and Merkel and for talks on Friday to try to hammer out differences ahead of the EU summit next week.

Monti and Hollande have each said they want more flexibility on deficit targets, with extra spending on public works or other pro-growth measures the European Commission could judge favorably.

"Monti doesn't need much, but he needs to come back from the EU summit with enough to tell voters that they won't have to make further sacrifices," said Maurizio Pessato, vice chairman of SWG polling company.

Both Monti and Hollande are also seeking some form of banking union and for ways to share sovereign risk, bring down debt costs and prevent further defaults.

Monti has suggested European bailout funds should be used to buy government debt for countries, like Italy and Spain, facing high servicing costs. Merkel has so far dismissed this as "theoretical".

DEATH BY EURO

Italian media on Friday said if the EU summit disappoints, then Berlusconi is ready to champion Italy's exit from the euro as a campaign issue ahead of next year's general election.

"Berlusconi's ultimatum: No more death by euro," read the front page of Il Giornale, the newspaper owned by the media magnate's brother, Paolo, a day after Berlusconi said leaving the euro would not be "blasphemy".

"Berlusconi was clear yesterday. Either Italy will convince Germany (at the summit) to change course, or anything is possible, including causing the government to fall, and if it's necessary, proposing an exit from the deadly euro," the Il Giornale editorial said.

With less than a year before the next general election, Italy faces the prospect of as many as four parties running on an anti-euro ticket.

The most notable example is the Five Star Movement led by comedian Beppe Grillo, which according to recent polls has overtaken the PDL to become Italy's second largest party, with more than 20 percent of voter support.

"Italy's political schizophrenia reflects, in miniature, the uncertainty that continues to weigh on Europe's future," wrote Massimo Franco in an editorial for Corriere della Sera on Friday.

"It's clearer by the day that if Europe does not reach a compromise, it will be harder to avoid a domino effect on national governments," he said.